JAAA - JAAA: A Great ETF Helping To Level The Playing Field

2023-11-05 03:53:43 ET

Summary

• Janus Henderson AAA CLO ETF provides investors with floating-rate exposure to high-quality AAA-rated CLOs.
• JAAA was the first ETF to offer direct exposure to the $700 billion+ AAA CLO market, previously only available to institutional investors.
• JAAA has a reasonable management fee of 0.22% and has historically outperformed other floating-rate investment products.
• JAAA offers investors a highly attractive risk-reward opportunity vs short-term treasuries and other floating-rate funds.

ETF Overview

The Janus Henderson AAA CLO ETF ( JAAA ) seeks to provide investors with floating-rate exposure via high quality AAA rated CLOs. The fund is actively managed and seeks to provide investors with the best opportunities within the AAA CLO space.

JAAA currently has $4.48 billion in assets and charges a net expense ratio of 0.22%. The fund currently holds 208 different securities and has a yield to worst of 7.4%. The weighted average maturity of the fund is 3.67 years and the effective duration of the fund is 0.05.

Innovative Product

JAAA launched in October 2020 and was the first ETF to provide direct exposure to AAA CLOs. The CLO market is a $700 billion+ asset class that had previously only been directly available to institutional investors.

AAA CLO's had long been used by active fixed income managers to provide alpha vs benchmarks. The reason for this is that AAA CLOs tends to offer ~90 bps of credit spread compared to lower rated corporate borrowers. AAA rated CLOs tend to be safer than high quality corporate bonds as no AAA rated CLO has ever defaulted.

Reasonable Management Fee

JAAA charges a management fee of 0.22%. To put that into context, the average fixed income ETF expense ratio is ~0.11%.

While JAAA is more expensive than the average fixed income ETF, it is actively managed and allows investors to get exposure to a segment of the market which is difficult to access. Additionally, JAAA appears reasonably priced compared to its closest peer the BlackRock AAA CLO ETF ( CLOA ) which has an expense ratio 0.20%. JAAA is also reasonably priced compared to other floating rate products such as the VanEck IG Floating Rate ETF ( FLTR ) and the iShares Floating Rate Bond ETF ( FLOT ) which have expense ratios of 0.14% and 0.15% respectively.

Strong Historical Performance

JAAA launched in October 2020 and has significantly outperformed other high quality floating rate investment products. JAAA has delivered a total return of 9.67% compared to a total return of 7.95% for FLTR and 7.45% for FLOT. U.S. government floating rate funds such as TFLO or the SPDR Bloomberg 1-3 Month T Bill ETF ( BIL ) have returned 6.36% and 5.42% respectively.

JAAA's closest peer is CLOA which launched in 2023. Since then, JAAA has performed largely in line with CLOA.

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Holdings Analysis

JAAA currently holds 208 securities and is well diversified with no single CLO accounting for more than 2.4% of the fund. Moreover, JAAA is also diversified in terms of CLO manager.

93.6% of JAAA assets are invested in the U.S. while 5.4% of assets are invested in Europe.

~94.8% of JAAA assets are AAA rated while 1.6% of assets are AA rated and 4.7% of assets are A rated. A small amount of exposure to CLOs rated below AAA is consistent with the fund's investing strategy which calls for 90% of net assets to be invested in AAA CLOs.

It is important to note than the 5% of assets invested in lower rated CLOs are still very high quality with AA and A ratings. Comparably, I would be concerned if the fund had significant exposure in lower rated CLOs.

My Favored Way To Get Floating Rate Exposure

JAAA is my currently my favorite way to get floating rate exposure. The 7.4% yield to worst compared to 5.5% yields for U.S. Government T-Bills, 5.57% offered by floating rate Treasury products such as TFLO, and ~6.5% offered by high grade corporate bond floating rate products such as FLTR.

I recently discussed in more detail why I favor JAAA compared to FLTR in my recent piece:

FLTR: A Solid ETF Buy Not My Favorite Floating Rate Play

Conclusion

In a world where many new ETFs have come to market offering very high fees for products that fail to deliver, JAAA stands out as a great ETF which has helped level the investment playing field between individual and institutional investors.

JAAA allows investors to access the AAA CLO market with active management at a very reasonable management cost of 0.22%.

JAAA has a strong history of outperforming other floating rate products and I expect this to continue going forward.

Currently, JAAA offers investors nearly 200bps of spread over T-Bills with very little credit risk. For this reason, I believe JAAA represents an excellent investment opportunity from a risk-reward perspective.

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